An oligopoly-fringe non-renewable resource game in the presence of a renewable substitute

Benchekroun, Hassan; Meijden, Gerard van der; Withagen, Cees

doi:10.1016/j.jedc.2019.05.014

Cited by 14 publications

(14 citation statements)

References 26 publications

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“…Recent results using mathematical models of strategic interactions suggest that oil players (mainly OPEC) may exhibit limit-pricing behaviors regarding RES [32][33][34]. US$/barrel [37], respectively.…”

Section: Will the Opec+ Emerge More Influential In The Post-covid-19 mentioning

confidence: 99%

How the COVID-19 Crisis is Showing us the Complexities in the Global Energy Transition

Meza¹,

Amado²,

Sauer³

2020

Preprint

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The measures for tackling the COVID-19 may shrink the global GDP by approximately 6% in 2020, the deepest post-war recession. As a result, the global energy demand declined by 3.8% in the first quarter of 2020. Concerning fossil fuels, this conjuncture reduced the demand drastically and collapsed the prices to historic levels. Despite the general market disruptions, renewable energy sources (RES) seem to be more resilient to the crisis because they are the only sources that will grow in demand in 2020, driven by priority dispatch. The RES´s significant growth in cumulative installed capacity in the last two decades and the significant cost reductions of RES and energy storage technologies are positive signs towards better market conditions for the global energy transition. Currently, the crisis is seen by international agencies and transition scholars as an opportunity to advance a renewable-based energy transformation. Nevertheless, this article aims at caution about another possibility: if societal changes are not urgently implemented, the crisis may weaken the global energy transition. This article examines this last possibility from a three-level perspective: 1) post-COVID economic recovery, 2) low oil and natural gas prices and competitiveness of alternative sources and, 3) reorganization of the world energy market and the OPEC+. This paper exists to stimulate debate.

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Section: Will the Opec+ Emerge More Influential In The Post-covid-19 mentioning

confidence: 99%

How the COVID-19 Crisis is Showing us the Complexities in the Global Energy Transition

Meza¹,

Amado²,

Sauer³

2020

Preprint

View full text Add to dashboard Cite

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“…The reason is that imperfect competition does not only affect the speed, but also the order of extraction of different reserves of oil (cf. Benchekroun et al, 2009Benchekroun et al, , 2010Benchekroun et al, , 2019. Conventional OPEC oil is cheaper and its extraction is less carbon intensive than unconventional oil owned by relatively small oil producers (Malins et al, 2014;Fischer and Salant, 2017;OCI, 2019).…”

Section: Introductionmentioning

confidence: 99%

“…Our paper is closely related to Benchekroun et al (2019), who built an oligopoly-fringe model of the oil market, taking into account the presence of a renewable substitute for oil. However, Benchekroun et al (2019) ignored climate damages, implying that they had to remain silent on the sequence effect of market power for climate change. Furthermore, they did not calibrate their model and left out a welfare analysis.…”

Section: Introductionmentioning

confidence: 99%

“…Almoguera et al, 2011;Brémond et al, 2012;Kisswani, 2016;Okullo and Reynès, 2016). We have also examined the case where the cartel consists of subgroups that act as Cournot oligopolists (see Benchekroun et al (2019) for the characterization of the equilibrium). The qualitative nature of the equilibrium and the policy implications remain unchanged, although the sequence effect becomes smaller (e.g., in case of 5 oligopolists 89 percent of the welfare loss of imperfect competition compared to the first-best is attributable to the sequence effect).…”

Section: Introductionmentioning

confidence: 99%

“…Benchekroun et al (2019) actually characterize an oligopoly-fringe equilibrium with n symmetric oligopolists. Our model is a special case of theirs, with n = 1.…”

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confidence: 99%

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OPEC, unconventional oil and climate change - On the importance of the order of extraction

Benchekroun

Meijden

Withagen

2020

Journal of Environmental Economics and Management

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We show that OPEC's market power contributes to climate change by enabling producers of relatively expensive and dirty oil to start producing before OPEC reserves are depleted. We examine the importance of this extraction sequence effect by calibrating and simulating a cartel-fringe model of the global oil market. While welfare net of climate damage under the cartel-fringe equilibrium can be significantly lower than under a first-best outcome, almost the entire welfare loss is due to the sequence effect of OPEC's market power. In our benchmark calibration, the cost of the sequence effect amounts to 15 trillion US$, which corresponds to 97 percent of the welfare loss. Moreover, we find that an increase in non-OPEC oil reserves decreases global welfare. In a counterfactual world without non-OPEC oil, global welfare would be 13 trillion US$ higher, 10 trillion US$ of which is due to lower climate damages.

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An Oligopoly-Fringe Model with HARA Preferences

2022

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Inspired by empirical evidence from the oil market, we build a model of an oligopoly facing a fringe as well as competition from renewable resources. We explore different subclasses of HARA utility functions (Cobb–Douglas, power and quadratic utility) to check the robustness of results found in the previous literature. For isoelastic demand, we characterize the equilibrium extraction rates of the fringe and the oligopolists. There always exists a phase of simultaneous supply of the oligopolists and the fringe, implying an inefficient order of use of resources since the oligopolists have smaller unit extraction costs and carbon emissions than the fringe. We calibrate our model to the oil market to quantify this sequence effect. In our benchmark calibration, we find for the three HARA subclasses that the sequence effect is responsible for almost all of the welfare loss compared to the first-best. It becomes smaller as market power decreases. Furthermore, we show that climate damage and Green Paradox effects depend non-monotonically on the degree of market power.

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An oligopoly-fringe non-renewable resource game in the presence of a renewable substitute

Cited by 14 publications

References 26 publications

How the COVID-19 Crisis is Showing us the Complexities in the Global Energy Transition

How the COVID-19 Crisis is Showing us the Complexities in the Global Energy Transition

OPEC, unconventional oil and climate change - On the importance of the order of extraction

An Oligopoly-Fringe Model with HARA Preferences

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